Demonetization has been the most tweeted topic for India in 2017. It has been touted by many as a classic case of execution failure, failed governance and lack of overall strategy execution. True. Mostly. However, the push for demonetization has nudged the creation of modernized infrastructures that could support digital transactions, buy-in from senior management and better governance, which eventually shall propel the country towards an eon of cashless transactions. As the amount of wealth increases in the system, newer forms of investment instruments and even newer forms of investment patterns emerge. This in turn gives rise to an era of WealthTech that in turn exponentially inflates the amount of data across computing platforms. This proliferation of data is what emanates the need for faster transaction processing and faster authentication mechanisms. Voila! A technology that resides on the cusp of this is blockchain. Let’s try and decode it before diving deeper.

Blockchain

If you ask me, I’m biased towards blockchain and I’d say blockchain was the star child hidden behind bitcoin. But is that also an unbiased opinion? How many people understand blockchain? Many people confuse it with bitcoin, but it is far from that. Bitcoin is an encrypted digital currency, while blockchain is the base technology required for bitcoins to function. Currently, most people use a bank as a middleman to make money transactions – either via digital wallets, credit/debit cards or cheques. Blockchains allow consumers and suppliers to connect directly, as they completely eliminate the need for a third party (significantly driving down costs and dramatically improving turnaround times through the reduction in steps involved). Let’s explain blockchain in simple words for the benefit of everyone.

Blockchain is primarily a ledger of all transactions that have been executed, which are stored cryptographically on a distributed database. A block can be single or multiple transaction/s. Each time a transaction is completed, it is linked to a chain, with every block containing a hash of the previous block in a chronological sequence. The fact that it is distributed and secure makes it impossible for any hacker to hack into it, as hacking or manipulating it would require updates to all the blocks within the blockchain at the same time in real time, making an attack almost impossible with the available sets of technologies currently available.

Some of the benefits to using blockchain technology include, but are not limited to:

• blockchain records are secure and reliable;
• blocks are immutable and this prevents hacking;
• it discards the need for a third party or central party to validate transactions.

Some of the banks/financial entities involved in investing, “proofs of concept” in the blockchain space, include players like Nasdaq, Visa, Standard Chartered Bank, Citibank, DBS, BNY Mellon, UBS, Santander, Barclays, Deutsche, BNP Paribas, Euro Banking Association, Fidor Bank, LHV Bank, Goldman Sachs, and many more.

Applications in Asset and Wealth Management

In order to dive into the applications for blockchain within asset and wealth management, let’s look at typical asset and wealth management functions and shortcomings. Insights into the current problems will provide clarifications on solutions that can be addressed by blockchain.

Let’s look at the current processes within a capital market, apart from the typical usage of bitcoin for bad versus good. Figure 1 explains the typical processes involved.

The issuance of securities is a critical path within capital markets and securities could be issued as debt (bonds) or equity (stocks) based on the company’s need for capital alongside other financial considerations. This issuance in turn requires the creation, management and distribution of physical documents like stock certificates and bond notes. Post-issuance, these are traded over securities exchanges. Some of the key players involved in the securities issuance process include investment bankers, asset managers, lead managers, regulators, syndicate members and issuers.

The involvement of multiple entities and intricate processes leads to multiple versions of the truth, longer settlement times and many other problems, as depicted in Figure 2.

Blockchain as a Backbone

Public and private security issuance can be managed via blockchain technology and physical documents can be fully digitized via smart securities. Smart contracts can be put in place that reduce the number of intermediaries involved between customers and producers, and dramatically improve efficiency. The smart contracts are an integral part of maintaining and establishing smoother supply chain cycles without the need for human intervention.

For example, a tulip flower buyer can utilize a smart contract in conjunction with a thermosensor that is directly linked to the smart contract. The moment the temperature increases to a non-acceptable level in the shipping container, the contract is cancelled and the shipment will be routed back without the need for checking, validating or negotiating return/payment terms. This ensures the consumer gets what he pays for and the producer in turn ensures safer transportation with better packaging mechanisms to guarantee reliable delivery.

Drawing a parallel with the stock market, blockchains would help with the transfer of securities from one party to another via a distributed ledger through secure transactions, allowing direct dealings between issuers, syndicate members and investment banks while providing tracking of real-time ownership of underlying securities. This would also drive down costs, as the need for multiple intermediaries is eliminated. A blockchain would thus help resolve all the current market challenges via the following routes:

• All the parties involved view a single version of the truth via the distributed ledger and common blockchain platform.
• The settlement risk is reduced as clear visibility on ownership is provided and time to execute transactions is significantly reduced.
• Manual processes for issuance, settlement, validation and clearing are automated via the use of smart contracts.
• The clearing and settlement time is currently three days in America and two days in Europe, which can be reduced to less than 10 minutes using blockchain.
• The entire process is online, immutable and available via the distributed ledger of transactions, which makes auditing mechanisms and tracking extremely simple and transparent.

Blockchain Market Opportunities

In order to make this chapter more exciting, I dive into the possible ramifications of blockchain (positive or negative), examples of its use across the domestic and international markets, and a glimpse into the possible market size for blockchain, which is extremely relevant and exciting for bankers, insurers and venture capitalists, to name but a few.

The other potential area for blockchain disruption is trade finance, as this space includes multiple entities – importers, exporters, government agencies, logistics operators, shipping companies and related insuring companies. Blockchain can be used in the above example to create legal smart contracts, digital sales processes, facilitate monitoring of goods via ubiquitous computing sensors and payment processing/clearing in real time. For example, R3 CEV (consortium of 50 + global banks) investigating blockchain applications in the financial services space has up-voted the trade finance use case as the most promising and core area of focus.

Some other areas in the non-financial realm that are witnessing a disruptive blockchain presence include ownership proofs for application development, origin sourcing for diamonds to tell apart blood diamonds, digital identities that could flow across applications in the digital and physical world, end-to-end verifiable blockchain voting software that ensures power resides with the voter and not the vote counter, a global healthcare identity that maintains your identity across providers and geographies using “elliptic curve cryptography” (an encryption feature used with bitcoin ownership), and a distributed cloud storage system that encrypts all data stored on the cloud and only allows the owner to view his/her data at a per TB price for storage and bandwidth consumption that’s cheaper than Amazon Web Services S3 and Microsoft Azure.

Blockchain savings in the security issuance and regulatory aspects easily add up to US$10–12 billion, merely by applying it to the settlement use case. It would also help free up capital for banks and other entities that currently need to store several billions for trades that are currently being settled due to clearing, settlement and possible counterparty risks. Extrapolating this example by including all banks, financial entities, related players and extending the applications of blockchain across applicable supply chains in financial and non-financial realms, we are on schedule to behold a major disruption.

Let’s hop on to witness a trillion-dollar industrial revolution together.